Starbucks Corporation: sees tough times ahead

Seattle / WA. (sc) Coffee giant Starbucks Corporation last week reported financial results for its fourth quarter as well as full fiscal 2008 results. As Starbucks moves from fiscal 2008, a year of significant transition for the company, it is well positioned to deliver in fiscal 2009 with the following foundational planks in place:

  • re-architected cost structure to allow for long-term operating margin expansion;
  • healthier store portfolio achieved through closure of underperforming stores;
  • stronger value and rewards platform – consistent with Starbucks premium brand;
  • renewed emphasis and investment around coffee leadership;
  • galvanized company with a common purpose.

«With a re-architected cost structure at the close of fiscal 2008, we began the new fiscal year with a healthier store portfolio that will allow for operating margin expansion», commented Howard Schultz, chairman, president and CEO. «Despite a global economic environment which shows no immediate signs of improvement, the steps we took in FY 2008 position us to deliver EPS growth in FY 2009», he said in a statement.

Schultz: «We appear to be more resilient than many other premium brands. And while we cannot call isolated signs of improving sales a trend, we are encouraged by our ability to drive increased traffic at a relatively low cost, as we did on Election Day. As we head into the holiday season and Calendar 2009, consumers are looking for value and we have been pleased with the steady progress of our Starbucks Rewards program and the enthusiastic reception to the Starbucks Gold Card. I am optimistic we are well positioned to weather this challenging economic environment».

Fourth Quarter Fiscal 2008 Summary

Consolidated net revenues increased three percent to 2,5 billion USD for the fourth quarter of 2008, compared to 2,4 billion USD for the fourth quarter of 2007. For the 13-week period ended September 28, 2008, Starbucks reported net income of 5,4 million USD, which included 105,1 million USD of restructuring charges and other transformation strategy costs. Net income was 158,5 million USD for the same period a year ago. Earnings per share (EPS) for the quarter was 0,01 USD, compared to 0,21 USD per share earned in the prior year period. The company estimates that restructuring charges and costs associated with the execution of its transformation agenda impacted fourth quarter 2008 EPS by approximately 0,09 USD per share. The majority of these costs consist of charges associated with company actions announced in July of 2008 to close approximately 600 company-operated stores in the U.S. and 61 company-operated stores in Australia, and reduce approximately 1’000 open and filled positions within its leadership structure and non-store organization. Excluding the restructuring charges and other transformation costs, fourth-quarter fiscal 2008 non-GAAP net income was 71,0 million USD and non-GAAP EPS for fiscal fourth quarter 2008 was 0,10 USD per share.

Fiscal 2008 – Year in Review

For fiscal 2008, consolidated net revenues increased ten percent to 10,4 billion USD, compared to 9,4 billion USD for fiscal 2007. Company-operated retail revenues in fiscal 2008 rose ten percent to 8,8 billion USD from 8,0 billion USD in fiscal 2007, due to the opening of 681 net new company-operated stores, offset by a three percent decline in comparable store sales for the twelve-month period. The weakness in consolidated comparable store sales was driven by the U.S. segment, which posted comparable store sales of negative five percent. Partially offsetting this was positive two percent comparable store sales in the International segment for the year. Specialty revenues grew 14 percent for the year to 1,6 billion USD from 1,4 billion USD in fiscal 2007.

Operating income for fiscal 2008 decreased to 504 million USD, compared to 1,1 billion USD for fiscal 2007. Operating margin contracted 630 basis points to 4,9 percent of total net revenues for the full year ended September 28, 2008; from 11,2 percent for the same period a year ago. Margin compression was primarily due to lower revenues; in addition, restructuring charges associated with the store closures and right-sizing of the business and support organization accounted for approximately 40 percent of the decrease. Excluding restructuring charges and other transformation strategy costs, non-GAAP operating margin for fiscal year 2008 was 8,1 percent.

Net earnings totaled 315,5 million USD for fiscal 2008, versus 672,6 million USD in fiscal 2007, while EPS for the year was 0,43 USD, compared to EPS of 0,87 USD in fiscal 2007. For the full year 2008, restructuring charges and other transformation costs impacted EPS by approximately 0,28 USD per share. Excluding these charges, non-GAAP EPS for fiscal year 2008 was 0,71 USD per share.

Info: The complete press release «Starbucks Reports Fourth Quarter and Fiscal 2008 Results» is available here.

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